ACRP 01-14 Considering and Evaluating Airport Privatization Appendix H Appendix H Detailed Airport Case Studies H.1 Case Study Selections Case studies can be a useful means of illustrating first-hand experiences and lessons learned from those experiences. The purpose of this task is to document case studies to illustrate lessons learned for a range of airport sizes, privatization strategies, and forms of governance for both successful and unsuccessful efforts. For each case study, the research team documented (1) the initial goals and objectives of the airport sponsor for undertaking the privatization initiative, (2) a summary of the process employed, (4) a summary of the business terms of the initiative, (4) documentation of the experience to date, and (5) lessons learned. Literature reviews, transaction document reviews, and interviews were used to gather information for the case studies. Each case study considers the objectives, timeline, competitive bidding process, stakeholder interests, business terms, and the consequences (including development and operational experiences) and then presents lessons learned. It should be noted that, where the responses of individual interview participants are referred to in this report, these represent the interviewee’s own views and perceptions. However such responses have only been included to where they appear to represent opinions held more widely, or have been directly substantiated by other means On the basis of recommendations and justifications put forth by the research team, the ACRP Panel decided to ask the team to conduct case studies of the domestic and international airports as noted below. H.1.1 Domestic Airports Airport System Management Contract: 1. Indianapolis Airport Authority – airport system comprising a medium-hub airport and 5 general aviation airports, which entered into an airport system management contract that reverted back to public operation. Developer Financing and Operation: 2. John F. Kennedy International Airport, Terminal 4 (JFK-IAT) – large-hub airport, private development, financing, and operation of a major international unit terminal. 3. Boston Logan International Airport Terminal A – large-hub, terminal development, where private developer financing was initially considered, then airline special facility financing was undertaken, which was followed by the airline’s bankruptcy resulting in a workout of the transaction documents. Airport Privatization Pilot Program (APPP) applicants: 4. Stewart International Airport – non-hub airport and only airport approved under the APPP, which reverted back to public operation. H-1 ACRP 01-14 Considering and Evaluating Airport Privatization Appendix H 5. Chicago Midway International Airport – large-hub airport that occupies the only large- hub slot under the APPP, which was put on hold after the financial crisis in the fall of 2008. The case studies for Stewart International Airport and Midway Airport provide interesting contrasts and helpful background for any airport considering privatization under the APPP. Full Privatization Outside the APPP: 6. Morristown Municipal Airport – general aviation airport with long-standing, long-term airport-wide management and development agreement. H.1.1 International Airports 7. Sydney Airport or Kingsford Smith Airport -- trade sale under 99-year lease, which includes light-handed regulatory regime with relationship between privatization, regulation, and service quality (June 2002). 8. London Gatwick Airport International Airport -- secondary sale to pre-empt the expected actions of the UK Competition Commission, which was the largest airport transaction since the credit crunch and “Great Recession” and offers the opportunity to consider interesting issues such as competition concerns, economic regulation, pricing of risk, and financing considerations (December 2009). The panel made the decision for the case studies on the basis of working papers submitted by the research team on the merits of the various candidates for airport case studies and the diversity to cover the full spectrum of privatization strategies and airport sizes. H-2 ACRP 01-14 Considering and Evaluating Airport Privatization Appendix H H.2 Indianapolis Airport Authority H.2.1 Background Indianapolis International Airport (IND) is a medium-hub airport located 7 miles west of downtown Indianapolis. IND is operated by the Indianapolis Airport Authority, a municipal corporation formed in 1962 and governed by an 8-member Board (with 5 members appointed by the mayor of Indianapolis) that also operates a downtown heliport and 4 reliever airports (Eagle Creek Airpark, Hendricks County Airport/Gordon Graham Field, Metropolitan Airport, and Mt. Comfort Airport), collectively, the airport system. In November 2010, 9 passenger airlines and their regional affiliates provided scheduled service from IND to 34 airports in the U.S., Canada, and Mexico. Delta Air Lines and its regional affiliates have the largest share (approximately 26%) of scheduled departing seats at IND, followed by Southwest Airlines with an 18% share and US Airways with a 13% share.1 No other airline (including regional affiliates, if any) account for more than 10% of seats. IND is also the second-largest hub for FedEx Express, with approximately 650 flights per month supported by a 2-million-square-foot facility on 280 acres on airport.2 Also on airport is the Indianapolis Maintenance Center, one of the largest maintenance, repair, and overhaul facilities in the world, built in 1994 for United Airlines but turned back to the Authority in 2004 as a result of United’s Chapter 11 bankruptcy. In 1994, the Board created a Managed Competition Committee to oversee a competitive bidding process for the rights to operate, maintain, and manage the airport system. Although the Board considered an outright sale or lease of the Authority’s airports, it decided against doing so because of the difficulty in getting regulatory approval. The Authority staff participated in the competitive-bidding process against four private-sector firms, but lost the competition to BAA Indianapolis LLC, a subsidiary of BAA USA, itself a subsidiary of BAA International (collectively “BAA”). At the time of executing the management contract with the Authority in October 1995, BAA operated 6 airports in the United Kingdom, including London’s Heathrow and Gatwick airports, and maintained a contract with Allegheny County to manage the terminal concession program at Pittsburgh International Airport. The contract was anticipated to generate cost savings and nonairline revenue increases totaling $100 million over its 10-year term through 2005. Under the terms of the management contract, BAA was to be compensated on the basis of savings in airline payments per enplaned passenger versus a baseline cost defined in the contract. In 2003, the management contract was extended through December 31, 2007. However, in June 2007, the Authority and BAA negotiated an early termination of the management contract and the following month the Authority again assumed full responsibility for the operation and management of airport system. Much of the management and staff of BAA remained at the Authority in the same or similar positions following the transition to back Authority management. 1 Based on schedules published by Official Airline Guides for 2010. 2 FedEx in Indianapolis, FedEx Corporation, http://news.van.fedex.com/node/743, retrieved November 10, 2010. H-3 ACRP 01-14 Considering and Evaluating Airport Privatization Appendix H H.2.2 Objectives With the election of Stephen Goldsmith as mayor in 1991, the city ideologically pursued many privatization initiatives. The initiatives were undertaken as the city faced pension funding deficits, unfunded infrastructure needs, and increased competition from suburban municipalities for jobs. The city adopted a “managed competition” approach whereby private-sector companies competed to operate “policy-implementing” functions, with the city retaining control over “policy-making” decisions. Existing municipal departments were invited to participate in the competitive-bidding process. Between 1992 and 1997, the city outsourced more than 70 city services to managed competition with an estimated total savings of $230 million being achieved. Non-public safety headcount fell by more than 40 percent over this period, with taxes decreasing slightly.3 After a high profile privatization of the city’s wastewater treatment operations in 1993 that resulted in operating expense savings and improved customer service, Mayor Goldsmith (who appointed 5 of the 9 Authority board members) identified the Authority as a potential managed competition opportunity. Increasing airline costs, lackluster nonairline revenue performance, and upcoming capital requirements were cited as a rationale for evaluating privatization, with airline costs being the overriding driver. Airline rates and charges at IND were calculated using an airport-system residual methodology, whereby airlines paid for the net costs of operating the airport system after a credit of all nonairline revenues. Therefore, all other things unchanged, any reductions in operating expenses and capital charges or increases in nonairline revenues would accrue to the airlines. With the requisite infrastructure in place, the Authority hoped that private-sector management expertise would help the airport reduce airline costs, therefore attracting additional passenger and cargo airline service, and become a premier intermodal distribution